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The decision of the United Arab Emirates (UAE) to leave OPEC and OPEC+ may not lead to an immediate fall in oil prices but is likely to increase volatility and weaken the long-term price stability provided by the cartel, according to a report by ASK Wealth Advisors.
The report said that the near-term impact on oil prices is not straightforward, and investors should avoid making simple directional assumptions. It stated "The near-term oil price effect is not straightforward and investors should resist simple directional conclusions. In a market already shaped by post-Hormuz supply disruption, geopolitical risk premia, and shipping vulnerability, the announcement may not immediately push prices lower" In such a scenario, the UAE's exit could initially add to uncertainty rather than reduce prices. The report explained that any reduction in visible coordination among major producers may increase the risk premium in the short term, especially when global spare capacity is already at historically low levels due to supply disruptions linked to the Iran conflict. However, over the medium term, the report indicated that the UAE's exit may reduce the "cartel premium" associated with OPEC+, leading to a broader trading range for oil prices. It added that prices may not move in a straight line downward but could become more volatile, with less certainty around price floors. The report noted that the UAE is unlikely to flood the market with excess supply, as it would risk damaging long-term customer relationships and market stability. Instead, the country may gradually increase production closer to its capacity levels. This could raise concerns about whether OPEC+ can maintain discipline without one of its key members and whether Saudi Arabia would have to take on a larger share of production cuts to stabilise the market. According to the report, this shift may lead to a sustained discount on future OPEC agreements, as market participants begin to question the effectiveness and credibility of coordinated supply actions. The United Arab Emirates announced its decision to exit the Organisation of the Petroleum Exporting Countries (OPEC) and the wider OPEC+ alliance on Tuesday. Explaining the reasons behind the UAE's exit, the report said the move reflects a combination of strategic, economic and geopolitical factors. It highlighted that the UAE has significantly expanded its oil production capacity over the years and has faced constraints under the OPEC+ quota system, which limits how much it can produce. With global energy security concerns rising and demand remaining resilient, the opportunity cost of restricting output has increased. The report noted that the UAE may be seeking to maximise the value of its low-cost reserves within a limited window of opportunity. Geopolitical tensions have also played a role. The report pointed to Iran's blockade of the Strait of Hormuz and attacks on Gulf energy infrastructure earlier this year, which created operational challenges for the UAE while it remained part of the same organisation. The UAE's infrastructure, such as the Abu Dhabi Crude Oil Pipeline (ADCOP), which can handle around 1.5-1.8 million barrels per day of its 3.5 million barrels per day production capacity, provided some resilience but also highlighted the limitations of operating under production constraints during a supply crisis. The report further noted that the UAE's exit carries significant weight as it is OPEC's third-largest producer and a founding member, having joined through Abu Dhabi in 1967. (ANI)
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